##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For Quarter Ended: June 30, 2006
 USN CORPORATION
  COLORADO
    
    33-42701
    
    84-1186026(State or other jurisdiction
of incorporation)
    
    (Commission
File Number)
    
    (IRS Employer
Identification No.)
 5215 NORTH OCONNOR, SUITE 200, IRVING, TEXAS 76039
 (310) 201-9900
 o x
 o x
 x o
  o x




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##### 



USN Corporation and Subsidiaries
 INDEX
 PagePART I.
    
    FINANCIAL INFORMATION (Unaudited)Item 1.
    
    Condensed Consolidated Balance Sheet as of June 30, 2006
    
    
    3Condensed Consolidated Statements of Operations for the Three
    
    
    4Months Ended June 30, 2006 and 2005
Condensed Consolidated Statements of Cash Flows for the Three
    
    
    5-6Months Ended June 30, 2006 and 2005
Notes to Condensed Consolidated Financial Statements
    
    
    7-22Item 2.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    23-27Item 3.
    
    Controls and Procedures
    
    
    28PART II.
    
    OTHER INFORMATION
    
    
    29-32EXHIBIT 31.1EXHIBIT 32.1
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USN Corporation and Subsidiaries
Condensed Consolidated Balance Sheet
June 30, 2006
(Unaudited)
 ASSETSCurrent assetsCash and cash equivalents
    
    $
    4,143Restricted cash
    
    
    662,908Accounts receivable
    
    
    279,174Inventory, net
    
    
    836,625Prepaid expenses and other assets
    
    
    517,982Total current assets
    
    
    2,300,832Property and equipment, net
    
    
    262,082Restricted cash
    
    
    630,000Deposits and other assets
    
    
    73,098Total assets
    
    $
    3,266,012LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilitiesNote payable to related party
    
    $
    500,000Notes payable
    
    
    550,500Cash overdraft
    
    
    122,810Accounts payable trade
    
    
    5,441,260Accrued expenses and other liabilities
    
    
    9,269,221Liabilities of discontinued operations
    
    
    515,330Due to affiliates
    
    
    4,159,377Total current liabilities
    
    
    20,558,498Commitments and contingenciesStockholders deficitPreferred stock: $.0001 par value; authorized 5,050,000 shares;
no shares issued and outstanding
    
    
    Common stock: $.0001 par value; authorized 195,000,000 shares;
23,936,984 shares issued and outstanding
    
    
    2,394Additional paid in capital
    
    
    11,116,796Stock subscriptions receivable
    
    
    (703,011
    )Deferred compensation
    
    
    (179,167
    )Treasury stock to be returned for cancellation
    
    
    (3,269,112
    )Accumulated deficit
    
    
    (24,260,386
    )Total stockholders deficit
    
    
    (17,292,486
    )Total liabilities and stockholders deficit
    
    $
    3,266,012
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USN Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2006 and 2005
(Unaudited)
 2006
    
    
    2005Product sales
    
    $
    4,783,911
    
    
    $
    5,310,055Cost of sales
    
    
    2,679,952
    
    
    
    3,450,463Gross profit
    
    
    2,103,959
    
    
    
    1,859,592Costs and expensesSelling and distribution
    
    
    4,108,069
    
    
    
    3,122,872General and administrative
    
    
    900,062
    
    
    
    819,223Noncash compensation expense
    
    
    70,887
    
    
    
    Interest expense
    
    
    158,728
    
    
    
    19,028Total costs and expenses
    
    
    5,237,746
    
    
    
    3,961,123Loss from continuing operations
    
    
    (3,133,787
    )
    
    
    (2,101,531
    )Discontinued operationsLoss from discontinued operations
    
    
    
    
    
    
    (195,294
    )Loss from discontinued operations
    
    
    
    
    
    
    (195,294
    )Net loss
    
    $
    (3,133,787
    )
    
    $
    (2,296,825
    )Net loss per share, basic and dilutedContinuing operations
    
    $
    (0.13
    )
    
    $
    (0.18
    )Discontinued operations
    
    
    
    
    
    
    (0.02
    )Net loss per share, basic and diluted
    
    $
    (0.13
    )
    
    $
    (0.20
    )Weighted average shares outstanding
    
    
    23,534,621
    
    
    
    11,776,002
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USN Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 2006 and 2005
(Unaudited)
 2006
    
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (3,133,787
    )
    
    $
    (2,296,825
    )Loss from discontinued operations
    
    
    
    
    
    
    (195,294
    )Loss from continuing operations
    
    
    (3,133,787
    )
    
    
    (2,101,531
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    20,799
    
    
    
    12,538Noncash compensation expense
    
    
    70,887
    
    
    
    Amortization of beneficial conversion feature
    
    
    95,500
    
    
    
    Changes in operating assets and liabilities, net of effect of
acquisitions and divestitures:Restricted cash
    
    
    (9,907
    )
    
    
    (168,844
    )Accounts receivable
    
    
    (142,254
    )
    
    
    6,671Inventories
    
    
    407,346
    
    
    
    (4,059,851
    )Prepaid expenses and other assets
    
    
    (213,518
    )
    
    
    87,455Cash overdraft
    
    
    122,810
    
    
    
    Accounts payable
    
    
    (1,355,814
    )
    
    
    4,105,911Accrued expenses and other liabilities
    
    
    2,905,148
    
    
    
    627,484Due to/from affiliates
    
    
    560,168
    
    
    
    988,272Net cash used in continuing operations
    
    
    (672,622
    )
    
    
    (501,895
    )Net cash used in discontinued operations
    
    
    (59,517
    )
    
    
    (241,620
    )Net cash used in operating activities
    
    
    (732,139
    )
    
    
    (743,515
    )Cash flows from investing activitiesCapital expenditures
    
    
    (2,259
    )
    
    
    (42,445
    )Net cash used in investing activities
    
    
    (2,259
    )
    
    
    (42,445
    )Cash flows from financing activitiesLoan proceeds
    
    
    650,000
    
    
    
    Repayment of note payable to related party
    
    
    
    
    
    
    (54,000
    )Collections on stock subscription receivable
    
    
    
    
    
    
    1,000,000Net cash provided by continuing operations
    
    
    650,000
    
    
    
    946,000Net cash used in discontinued operations
    
    
    
    
    
    
    (44,531
    )Net cash provided by financing activities
    
    
    650,000
    
    
    
    901,469Net increase (decrease) in cash and cash equivalents
    
    
    (84,398
    )
    
    
    115,509Cash and cash equivalents, beginning of year
    
    
    88,541
    
    
    
    11,941Cash and cash equivalents, end of period
    
    $
    4,143
    
    
    $
    127,450
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USN Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows, Continued
Three Months Ended June 30, 2006 and 2005
(Unaudited)
 2006
    
    
    2005Supplemental cash flow informationCash paid for interest and income taxes:Interest
    
    $
    
    
    
    $
    Income taxes
    
    
    
    
    
    
    Non-cash investing and financing activitiesIssuance of common stock for:Convertible note payable and accrued interest
    
    $
    282,425
    
    
    $
    Accounts payable
    
    
    60,000
    
    
    
    Acquisition of Altron Limited
    
    
    
    
    
    
    5,060,000Liabilities assumed by LGS
    
    
    
    
    
    
    2,600,000Sale of jewelry stores to LGS
    
    
    
    
    
    
    1,021,249
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USN CORPORATION AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    Description of business and significant accounting policies and proceduresBusiness
USN Television Group, Inc. (USN TV) is a retailer of consumer products through interactive
electronic media using broadcast, cable and satellite television and the Internet. USN TV
focuses on presenting consumer products at attractive prices that can leverage the visual
appeal of television, including jewelry, watches, coins and other collectible products. USN
TVs programming is transmitted by satellite to cable television systems, direct broadcast
satellite systems and television broadcasting stations across the United States. Revenues
are primarily generated from sales of merchandise offered through USN TVs television home
shopping programming.USN TV segments its programming into product categories and each program uses a show-host
approach, with the host conveying information about the products and demonstrating their
use. The viewers can purchase any product USN TV offers, subject to availability.Background; corporate structure
USN Corporation (USN) was incorporated in the state of Colorado in 1988, under its former
name, Protron Systems, Inc. In 1994, USN purchased certain assets and assumed certain
liabilities from the bankruptcy estates of American Fashion Jewels, Inc. (Imposters) and,
in a separate transaction, Mirage Concepts, Inc. (Mirage), both of which were retail
chains of reproduction jewelry stores. USNs wholly owned subsidiary, USN TV was
incorporated in Delaware in April 2003. On June 17, 2005, USN acquired Altron Limited
(Altron) from Global Sun Enterprises, Ltd. (Global Sun). The consolidated financial
statements include the accounts of USN, USN TV and Altron (collectively the Company).
 Bankruptcy and Reorganization
   
    
    USN changed its name from Premier Concepts, Inc. to USN Corporation;
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
    
    USN acquired all of the outstanding stock of USN TV;
    
    The Bankruptcy Court classified and organized the treatment of creditors and
interest holders;
    
    USN issued securities to certain administrative claimants, to the USN TV
shareholders in consideration of the acquisition of USN TV, and to the Plan Trust
for the payment of certain creditors; and
    
    The liquidation of the securities to fund payments under the plan.
 Petition to Retroactively Modify Bankruptcy Plan
  Acquisition of USN TV
   Acquisition of Altron
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Sale of Retail Stores to LGS Holdings, Inc. (LGS)
     
    
    USN agreed to satisfy liabilities owed to Spotlight (or to third parties looking
to USN to satisfy Spotlights liabilities) in the amount of approximately $1.4
million;
    
    LGS agreed to assume liability for the remaining $2.6 million of liabilities
owed
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by USN to Spotlight or third parties;
    
    LGS acquired the 14 retail stores and all liabilities associated therewith;
    
    USN issued 1,368,422 shares of USN common stock to LGS in a private placement
exempt from the registration requirements of the Securities Act and also entered
into a registration rights agreement with LGS, pursuant to which USN agreed to file
a registration statement with the SEC covering the resale, from time to time, of
the shares of common stock issued to LGS; and
    
    USN and LGS agreed that additional shares could be issued to LGS depending upon
a final determination of the total liabilities assumed, subject to approval by the
Companys board of directors.
  Accounts payable, accrued expenses and other liabilities
    
    $
    1,603,278Notes payable
    
    
    366,424Total liabilities transferred
    
    
    1,969,702Less:Current assets
    
    
    558,713Non-current assets, net
    
    
    389,740Total assets transferred
    
    
    948,453Common stock expected to be issued
    
    $
    1,021,249
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
    
    an Amendment to Amended and Restated LGS Asset Purchase Agreement, pursuant to
which (i) LGS agreed to return 1,208,422 shares of USN common stock to USN for
cancellation in exchange for USNs agreement to re-assume and pay the liabilities
owed to Spotlight or third parties in connection with Spotlight, all of which had
been assumed by LGS in the LGS Purchase, and (ii) LGS retained ownership of the
retail stores and responsibility for certain liabilities associated therewith; and
    
    a Consulting Agreement, under which USN agreed to (i) provide certain services
to LGS in connection with the retail stores owned by LGS and (ii) assist LGS in the
closing or sale of the retail stores by December 31, 2005, in exchange for the
delivery by LGS of 10,000 shares of USN common stock, per month, to USN for
cancellation.
     11




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Principles of consolidation and presentation
   -
 -
 Revenue and cost recognition
 12




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Costs and expenses
 
    
    Cost of sales includes the cost of products sold, incoming freight charges, lost
shipments net of insurance reimbursement and product shrink.
    
    Selling and distribution cost includes operating media costs, labor cost for all
operations, postage and delivery and merchant fees and discounts. Shipping and
handling costs amounted to $106,031 and $138,080 during the three months ended June
30, 2006 and 2005, respectively.
    
    General and administrative cost includes administrative labor cost, rent,
insurance, professional services, travel and entertainment, director fees, supplies
and other costs incident to the administration of the business.
 Stock-based compensation
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Expected term
    
    3 yearsExpected volatility
    
    
    58.22
    %Expected dividend yield
    
    
    0
    %Risk-free interest rate
    
    
    4.75
    %Expected annual forfeiture rate
    
    
    0
    %
 Use of estimates
 Fair value determination
 Reclassification
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Recent accounting pronouncements
 2.
    
    Discontinued operationsIn December 2004, immediately after the acquisition of USN TV, management of USN approved a
plan to dispose of its retail jewelry store operations, in order to concentrate its efforts
and resources on the business of USN TV. Accordingly, the net results of operations of the
retail jewelry stores are included in discontinued operations for all periods presented. On
January 6, 2005, the Board of Directors of the Company unanimously ratified managements
plan.As a result of the approval of the plan of reorganization effective December 13, 2004 and
the acquisition of USN TV, the retail jewelry store operations are included in consolidated
operations only for the period since December 13, 2004. Revenues during fiscal 2006 were
$537,550 and the net loss was $195,294.Liabilities of discontinued operations at June 30, 2006, consist of notes payable of
$45,727, tax claims of $52,875, store lease claims of $255,008 and other accounts payable of
$161,720.3.
    
    Restricted cashAs a part of the agreements with credit card companies, the Company maintains a deposit
with the credit card companies, which amounted to $1,292,908 at June 30, 2006. The amount
of the deposit is based primarily upon historical returns. One of the credit card
companies that process the majority of the Companys sales retains a certain percentage of
sales to allow for potential returns to customers. This retained amount is currently
released to the Company within twelve months and at June 30, 2006 this amounted to $662,908
and is classified as a current asset. Another credit card company requires a deposit,
which is reviewed quarterly. At June 30, 2006, this amounted to $630,000 and is classified
as non-current.4.
    
    InventoryInventory, which primarily includes jewelry, watches, coins and other products, at June 30,
2006, consists of:
 Finished products
    
    $
    1,842,188Less inventory under
consignment or right-of-return
arrangements
    
    
    (1,005,563
    )Net inventory
    
    $
    836,625
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5.
    
    Property and equipmentProperty and equipment at June 30, 2006, consists of the following:
 Computer and broadcast equipment
    
    $
    262,728Leasehold improvements
    
    
    82,772Furniture and fixtures
    
    
    33,426378,926Accumulated depreciation and amortization
    
    
    116,844Property and equipment, net
    
    $
    262,082
 6.
    
    Notes payableNotes payable consists of the following at June 30, 2006:
 Notes payable:Notes payable to a group of lenders with interest
payable monthly at 12% per annum; due in 90 days;
collateralized by 750,000 shares of USN common stock,
currently issued to LGS and a part of the treasury
stock to be returned (Note 9); convertible into USN
common stock at $1.00 per share; loan origination fee
of 65,000 shares of USN common stock; 3-year warrants
for 650,000 shares of USN common stock at $1.35 per
share
    
    $
    650,000Unamortized beneficial conversion feature
    
    
    (99,500
    )Net notes payable
    
    $
    550,500Note payable to related party:Note payable to an affiliate of the principal
shareholder with interest payable monthly at 8%
commencing April 1, 2005; due March 21, 2006;
collateralized by USN TVs accounts receivable and
inventory; convertible into common stock at $2.00 per
share; interest payments since April 1, 2005, are
past due; principal is past due
    
    $
    500,000
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The debt discount is being amortized to interest expense over the term of the loans. At
June 30, 2006, $95,500 had been amortized to interest expense and $99,500 remains to be
amortized.7.
    
    Accrued expenses and other liabilitiesAccrued expenses and other liabilities at June 30, 2006, consist of the following:
 Customer refunds
    
    $
    5,126,894Deferred revenue
    
    
    1,837,510Reserve for customer returns
    
    
    373,000Accrued payroll and payroll taxes payable
    
    
    270,023Sales taxes payable
    
    
    96,099Accrued deferred compensation
    
    
    885,444Spotlight liabilities re-assumed from LGS
    
    
    426,084Accrued media and other
    
    
    254,167Total
    
    $
    9,269,221
 8.
    
    Related party transactionsThe Company had several transactions with related parties during fiscal 2007 and fiscal
2006, as follows:The Company purchased approximately $3,693,000 of merchandise inventory during fiscal 2006
(none in fiscal 2007), from Spotlight, a company previously owned by Messrs. Kelly and
Reinstein, two of the Companys major stockholders. In addition, the Company made payments
of approximately $1,380,000 to Spotlight during fiscal 2006. Spotlight was sold to LGS (see
Note 1 Sale of Retail Stores to LGS Holdings) in June 2005.In addition, the Company had numerous transactions with several companies affiliated with
Global Sun. As of June 30, 2006, Global Sun owned approximately 47% of the Companys
outstanding common stock (see Note 1 Acquisition of Altron). The Company purchased
approximately $1,904,000 and $2,297,000 of merchandise inventory (net of product returns)
from these companies, during the three months ended June 30, 2006 and 2005, respectively.
The Company made payments of approximately $1,891,000 and $2,000 during the three months
ended June 30, 2006 and 2005, respectively, and owe these companies approximately $3,995,499
at June 30, 2006.In March 2005, the Company issued a note payable to FJR, an affiliate of Global Sun, in the
amount of $500,000. The note was originally scheduled to mature on September 21, 2005;
however, the maturity date was extended to March 21, 2006. Interest is payable monthly at 8%
per annum; however, no payments had been made as of June 30, 2006.In December 2004, the Company entered into consulting and license agreements with companies
owned by Messrs. Kelly and Reinstein, two of the Companys major stockholders (see Note 11).
The Company incurred fees of approximately $120,000
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during both the three months ended June 30, 2006 and 2005, and owed approximately $164,000
to these companies at June 30, 2006.9.
    
    Capital stockPreferred stock
The Company has 5,050,000 shares of $.0001 par value preferred stock authorized and no
shares issued or outstanding at June 30, 2006.Common stock
The Company has 195,000,000 shares of $.0001 par value common stock authorized and
23,936,984 shares issued and outstanding at June 30, 2006.Stock Subscriptions Receivable
As a part of the acquisition of Altron, the Company acquired a $5,000,000 stock subscription
receivable, which had a balance of $584,061 at June 30, 2006.Two former officers of USN TV have notes payable to USN in the original amount of $158,600
for the purchase of 610,000 shares of the Companys common stock. The notes are due in four
annual installments of $39,650 plus interest at 3.56% on January 2. If the officers were
still employed on the January 2 anniversary date, USN TV had agreed to pay the officers a
bonus equal to the amount due. The first payments were recorded on January 2, 2006, leaving
a balance of $118,950. Both individuals have left employment with the Company and the note
agreements remain in full force and effect. The scheduled payment due each January
2nd shall be forgiven by USN TV, provided that the individuals are not in
material breach of their separation agreements.Deferred Compensation
Deferred compensation is unearned compensation and represents the unvested portion of
compensation accrued for the difference between the exercise price and the trading price of
the stock on the date of the grant. Deferred compensation will be amortized over the
vesting period.Treasury Stock to be Returned for Cancellation Upon Payment of Debt
At June 30, 2006, treasury stock to be returned for cancellation upon payment of debt
represents the net effect of the transactions described above relating to the LGS Purchase
and non-performance by LGS and is summarized below.Common stock that was expected to be issued for:
 Liabilities assumed in excess of assets transferred on June 17,
2005, representing the sale of the jewelry store operations to LGS
    
    $
    1,021,249
  Funding provided to LGS to satisfy liabilities assumed by LGS in the
June 17, 2005 purchase of Spotlight and the jewelry store operations
    
    $
    3,251,796
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Balance of liabilities of discontinued operations re-assumed from LGS
    
    
    515,330Balance due Spotlight vendors which was re-assumed from LGS
    
    
    426,084Management income, pursuant to Consulting Agreement between USN and
LGS, under which USN agreed to provide certain services to LGS in
connection with the retail stores owned by LGS, in exchange for the
delivery by LGS of 10,000 shares of USN common stock, per month, to
USN for cancellation (64,767 shares)
    
    
    97,151Total common stock to be returned for cancellation
    
    
    4,290,361Net treasury stock to be returned for cancellation (1,273,189 shares)
    
    $
    3,269,112
 10.
    
    Stock Compensation PlanOptions which were outstanding when the Company filed a voluntary petition under Chapter 11
of the Bankruptcy Code were cancelled in the plan of reorganization. The 1993 Incentive
Stock Option Plan and the 2002 Nonstatutory Stock Option Plan were terminated in the plan of
reorganization.On December 15, 2005, the USN board of directors approved the adoption of the USN
Corporation 2005 Stock Incentive Plan (the 2005 Plan). The 2005 Plan allows for the grant
of incentive and nonqualified stock options, stock appreciation rights, restricted stock
awards, restricted stock unit awards, performance awards and qualified performance awards.
The maximum number of shares of the Companys common stock that may be issued under the 2005
Plan is 5,000,000, with a maximum of 1,000,000 shares, or $1,250,000 in the case of a
qualified performance award, granted to any one participant during a calendar year. All
employees and consultants of the Company, as well as those persons extended an offer of
employment with the Company, are eligible to receive an award under the 2005 Plan. The
compensation committee of the Board shall determine who is to be granted an award, what type
of award and the number of shares or units to be awarded.The 2005 Plan will become effective upon, and any grant is subject to and may not be
exercised before, the approval by a majority of the Companys stockholders (the Effective
Date). Such approval must be made prior to the first anniversary of the Board adopting the
2005 Plan. If the 2005 Plan is so approved, the 2005 Plan will remain available for the
grant of awards until the tenth anniversary of the Effective Date.
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Weighted-Number
    
    
    AverageOf
    
    
    ExerciseOptions
    
    
    PriceOutstanding  Beginning of year
    
    
    1,014,584
    
    
    $
    1.11Granted
    
    
    95,000
    
    
    
    1.20Exercised
    
    
    
    
    
    
    Canceled or forfeited
    
    
    
    
    
    
    Outstanding  End of period
    
    
    1,109,584
    
    
    $
    1.11Exercisable  End of period
    
    
    406,945
    
    
    $
    .86
  Options OutstandingWeighted-Average
    
    
    NumberNumber
    
    
    Remaining
    
    
    ofOf
    
    
    Contractual
    
    
    OptionsExercise Price
    
    Options
    
    
    Life (Years)
    
    
    Exercisable$0.01
    
    
    100,000
    
    
    
    9.31
    
    
    
    100,000$1.00
    
    
    500,000
    
    
    
    9.71
    
    
    
    220,417$1.20
    
    
    95,000
    
    
    
    9.78
    
    
    
    5,278$1.50
    
    
    414,584
    
    
    
    9.30
    
    
    
    81,2501,109,584
    
    
    
    
    
    
    
    406,945
 The Company issued three-year warrants to acquire a total of 650,000 shares of its common
stock at $1.35 per share as a part of a convertible promissory note financing during the
three months ended June 30, 2006.11.
    
    Commitments and ContingenciesThe Company has two office sub-lease agreements which require a combined monthly payment of
$54,000, including parking, through September 2006. The space includes the broadcast
facility, warehouse, distribution center and operating and corporate offices. Future
minimum lease payments are: 2007  $162,000. The Company is currently negotiating for new
facilities at an annual reduction of approximately $312,000 from the current lease cost.As more fully described in Note 1, the Company has established an accrual relating to
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certain liabilities initially assumed by LGS, the purchaser of Spotlight and the jewelry
store operations in June 2005. On November 21, 2005, the Company amended the original asset
purchase agreement with LGS, and agreed to re-assume and pay all of the remaining
liabilities owed to Spotlight, in exchange for the return of 1,208,422 shares of its common
stock for cancellation. The accrued balance at June 30, 2006, consists of $515,330 in
liabilities of discontinued operations and $426,084 as the amount due Spotlight vendors
which was re-assumed from LGS. The amount due Spotlight vendors is included as a component
of accrued expenses and other liabilities in the accompanying consolidated balance sheet
(see Notes 7 and 9). The Company believes that it has established an adequate accrual based
on the amount it estimates is required to settle the remaining liabilities owed to previous
vendors and creditors of Spotlight and the retail stores. However, the actual amount
required may differ from the estimate.USN TV has a number of media contracts which are contingent upon the Company making the
required payment for air time in advance.The Company had a consulting agreement with a company owned by two major shareholders which
provides for consulting fees in the amount of $30,000 per month through December 17, 2005.
In addition, the Company had a lease, license and software support agreement with another
company owned by these two shareholders which provides for monthly payments of $10,000
through December 17, 2005. Both agreements are continuing on a month-to-month basis.12.
    
    LegalUSN will remain subject to the jurisdiction of the Bankruptcy Court until it makes its final
payment to unsecured creditors. USN has been a party to a number of disputes arising from
the bankruptcy, principally with former landlords. Management of the Company believes that
an adequate accrual for any potential loss has been provided at June 30, 2006.13.
    
    Going ConcernAt June 30, 2006, the Company had a working capital deficit of over $18,250,000. The
Company had a net loss of $14,627,550 and $5,804,666 for the years ended March 31, 2006 and
2005, respectively, and incurred a loss of $3,133,787 during the three months ended June
30, 2006. The Company does not have sufficient cash flows to meet its obligations due
within the next 12 months. These conditions raise substantial doubt about the Companys
ability to continue as a going concern.During 2006, the Companys gross margin averaged less than 30%. During the first quarter of
2007, the gross margin has improved to approximately 44%. The Company has a backorder
liability of approximately $1,837,000 as of June 30, 2006, as compared to approximately
$36,000 at March 31, 2006. Net sales have declined 10% in the 2007 first quarter from the
2006 first quarter; however, gross profit increased 13% despite the lower sales.
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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  LIQUIDITY AND CAPITAL RESOURCES
 GOING CONCERN
    23




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GENERAL
  a.
    
    We filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code on October 10, 2003. Our plan of reorganization was approved on December
12, 2004, which included the acquisition of USN TV.b.
    
    On June 17, 2005, we acquired Altron Limited, whose principal asset was a $5,000,000
stock subscription receivable and on the same date we completed the sale of the retail
jewelry stores to LGS. LGS also acquired Spotlight from Messrs. Kelly and Reinstein.
Spotlight was the principal jewelry supplier of USN TV and was owed approximately
$3,990,000 at the time of the acquisition by LGS.c.
    
    We determined that LGS was not paying the Spotlight vendors pursuant to the agreement
and ultimately reached an agreement with LGS for USN TV to re-assume and pay the remaining
liabilities in exchange for return of the majority of the shares originally issued to LGS.
The liabilities assumed have been recorded as a portion of the cost of the treasury stock
to be returned and cancelled upon payment of debt.
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##### Table of Contents



RESULTS OF OPERATIONS
 THREE MONTHS ENDED JUNE 30, 2006 AND 2005
 SALES AND COST OF SALES
  2006
    
    
    2005
    
    
    Inc (Dec)Gross sales
    
    $
    7,687,253
    
    
    
    
    
    
    $
    7,483,334
    
    
    
    
    
    
    
    3
    %Returns and allowances
    
    
    (3,003,059
    )
    
    
    
    
    
    
    (2,320,784
    )
    
    
    
    
    
    
    29
    %Shipping and handling
    
    
    99,717
    
    
    
    
    
    
    
    147,505
    
    
    
    
    
    
    
    (32
    %)Net sales
    
    
    4,783,911
    
    
    
    100
    %
    
    
    5,310,055
    
    
    
    100
    %
    
    
    (10
    %)Cost of sales
    
    
    2,679,952
    
    
    
    56
    %
    
    
    3,450,463
    
    
    
    65
    %
    
    
    (22
    %)Gross profit
    
    $
    2,103,959
    
    
    
    44
    %
    
    $
    1,859,592
    
    
    
    35
    %
    
    
    13
    %
 GROSS SALES
 RETURNS AND ALLOWANCES
 SHIPPING AND HANDLING
 NET SALES
 COST OF
SALES
 GROSS
PROFIT PERCENTAGE
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COSTS AND EXPENSES
  2006
    
    
    2005
    
    
    Inc (Dec)Selling and distribution expense
    
    $
    4,108,069
    
    
    $
    3,122,872
    
    
    
    32
    %General and administrative
    
    
    900,062
    
    
    
    819,223
    
    
    
    10
    %Non-cash compensation expense
    
    
    70,887
    
    
    
    
    
    
    
    Interest expense
    
    
    158,728
    
    
    
    19,028
    
    
    
    734
    %Total
    
    $
    5,237,746
    
    
    $
    3,961,123
    
    
    
    32
    %
 SELLING AND DISTRIBUTION
 2006
    
    
    2005
    
    
    Inc (Dec)Operating media
    
    $
    2,804,831
    
    
    $
    2,062,235
    
    
    
    36
    %Salaries and wages
    
    
    823,935
    
    
    
    619,407
    
    
    
    33
    %Merchant fees and discounts
    
    
    368,606
    
    
    
    270,730
    
    
    
    36
    %Postage and delivery
    
    
    106,031
    
    
    
    138,080
    
    
    
    (23
    %)Other costs
    
    
    4,666
    
    
    
    32,420
    
    
    
    (86
    %)Total
    
    $
    4,108,069
    
    
    $
    3,122,872
    
    
    
    32
    %
  GENERAL AND ADMINISTRATIVE EXPENSE (G&A)
 2006
    
    
    2005
    
    
    Inc (Dec)Salaries and wages
    
    $
    188,306
    
    
    $
    167,424
    
    
    
    12
    %Rent and parking
    
    
    125,125
    
    
    
    95,792
    
    
    
    31
    %Management fees with stockholders
    
    
    90,000
    
    
    
    90,000
    
    
    
    Software agreement with stockholders
    
    
    30,000
    
    
    
    30,000
    
    
    
    Professional services
    
    
    161,180
    
    
    
    161,189
    
    
    
    Other general and administrative costs
    
    
    305,451
    
    
    
    274,818
    
    
    
    11
    %Total
    
    $
    900,062
    
    
    $
    819,223
    
    
    
    10
    %
  26




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INTEREST EXPENSE 
 DISCONTINUED OPERATIONS
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ITEM 3: CONTROLS AND PROCEDURES
     28




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PART II  OTHER INFORMATION
 ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
   ITEM 5: OTHER INFORMATION
  ITEM 6: EXHIBITS
 31.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, Section 302 of the Sarbanes-Oxley Act
of 2002
    
    Page 3132.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act
of 2002
    
    Page 32
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SIGNATURE
  USN CORPORATIONDate:    August 10, 2006
    By:
    /s/ Mark J. MillerMark J. MillerChief Executive Officer
And Principal Accounting Officer 30